Netflix, Inc., is an American provider of on-demand internet streaming video in the United States and Canada, and flat rate DVD-by-mail in the United States. The company was established in 1997 and is headquartered in Los Gatos, California. It started its subscription service in 1999 and by 2009 it was offering a collection of 100,000 titles on DVD, surpassing 10 million subscribers. On February 25, 2007, Netflix announced the billionth DVD delivery. In April 2011, Netflix announced 23.6 million subscribers. In the Summer of 2011, Netflix announced they will expand into the international market, starting in Spain by 2012.
Netflix was founded in 1997 in Scotts Valley, California by Marc Randolph and Reed Hastings, who previously had worked together at Pure Software, along with Mitch Lowe. Hastings was inspired to start the company after being charged late fees for returning a rented copy of Apollo 13 after the due date. The Netflix website launched in April 1998 with an online version of a more traditional pay-per-rental model (US $4 per rental plus US $2 in postage; late fees applied). Netflix introduced the monthly subscription concept in September 1999, then dropped the single-rental model in early 2000. Since that time the company has built its reputation on the business model of flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or per title rental fees.
Netflix developed and maintains an extensive personalized video-recommendation system based on ratings and reviews by its customers. On October 1, 2006, Netflix offered a $1,000,000 prize to the first developer of a video-recommendation algorithm that could beat its existing algorithm, Cinematch, at predicting customer ratings by more than 10%.
"Some 35,000 different film titles are contained in the 1 million DVDs it sends out every day."
Netflix has played a prominent role in independent film distribution. Through a division called Red Envelope Entertainment, Netflix licensed and distributed independent films such as Born into Brothels and Sherrybaby. As of late 2006, Red Envelope Entertainment also expanded into producing original content with filmmakers such as John Waters. Netflix announced plans to close Red Envelope Entertainment in 2008, in part to avoid competition with its studio partners.
Netflix initiated an initial public offering (IPO) on May 29, 2002, selling 5,500,000 shares of common stock at the price of US $15.00 per share. On June 14, 2002, the company sold an additional 825,000 shares of common stock at the same price. After incurring substantial losses during its first few years, Netflix posted its first profit during fiscal year 2003, earning US $6.5 million profit on revenues of US $272 million. The company is well-known for its worker-oriented culture, including unlimited vacation time for salaried workers and allowing those employees to take any amount of their paychecks in stock options.
Netflix has been one of the most successful dot-com ventures. A The New York Times article from September 2002, said that, at the time, Netflix mailed about 190,000 discs per day to its 670,000 monthly subscribers. The company's published subscriber count increased from one million in the fourth quarter of 2002 to around 5.6 million at the end of the third quarter of 2006, to 14 million in March 2010. Netflix's growth has been fueled by the fast spread of DVD players in households; as of 2004, nearly two-thirds of U.S. homes had a DVD player. Netflix capitalized on the success of the DVD and its rapid expansion into U.S. homes, integrating the potential of the Internet and e-commerce to provide services and catalogs that brick and mortar retailers could not compete with. Netflix also operates an online affiliate program which has helped it to build online sales for DVD rentals.
Netflix is a subscription-based movie and television show rental service that offers media to subscribers via Internet streaming and via US mail.
Netflix offers Internet video streaming ("Watch Instantly") of selected titles to computers running Windows or Mac OS X and to compatible devices. Internet video streaming comes at no additional charge with Netflix's regular subscription service; however, only a portion of Netflix's content is available via the "Watch Instantly" option. In its simplest form, video is streamed to the user using standard PC hardware, and requires Microsoft's Silverlight software to be installed. Viewing is initiated by pressing a "Play Instantly" button, and played back on the PC monitor. Films can be paused or restarted at will. According to a 2011 report by Sandvine, Netflix is the biggest source of North American web traffic, accounting for 24.71 percent of aggregated traffic.
Initially, the feature offered subscribers one hour of media for approximately every dollar they spent on their subscription. (A $16.99 plan, for example, entitled the subscriber to 17 hours of streaming media.) In January 2008, however, Netflix lifted this restriction. Virtually all subscribers now are entitled to unlimited hours of streaming media at no additional cost. Subscribers with a plan of $4.99/two DVDs per month, one DVD at a time, are allowed two hours which can only be watched on a computer. The new terms of the service are a response to the introduction of Apple's new video rental services.
According to Netflix Tech Support, Netflix's content library is encoded into three bandwidth tiers, in a compression format based on the VC-1 video and Windows Media audio codecs. The lowest tier requires a continuous downstream bandwidth (to the client) of 1.5Mbps, and offers stereo audio and video quality comparable to DVD. The middle tier requires 3Mbps, and offers "better than DVD quality". The highest tier requires 5 Mbps, and offers 720p HD with surround sound audio. As of December 2010, the PS3 is the only device able to stream Netflix at 1080p resolution.
Netflix does not support playback on Linux PCs although the Linux-based Roku devices are supported. It is possible to connect the Roku device, game console, or blu-ray player to a Linux PC (or directly to the computer monitor) with an adapter. It is also possible to run Windows and Netflix in a virtual machine such as Virtualbox or Qemu. In a TechRepublic interview in August 2010, Netflix's VP of Corporate Communications stated that available Silverlight plugins for Linux, such as Moonlight, do not support the PlayReady DRM system that Netflix requires for playback. Netflix does support the Android operating system, which uses the Linux kernel, although is otherwise separate from Linux.
In March 2011, Netflix announced plans to begin acquiring first-run original content for its popular Watch Instantly subscription service, beginning with the hour-long political drama House of Cards, which will debut on the streaming service in late 2012. The series will reportedly be helmed by David Fincher, with Academy Award winning actor Kevin Spacey headlining the cast.
Netflix is rumored to have outbid heavyweights HBO and AMC, two of the current market leaders in original dramatic programming. As Deadline.com reported on March 15, 2011:
"Netflix landed the drama project by offering a staggering commitment of two seasons, or 26 episodes. Given that the price tag for a high-end drama is in the $4–$6 million an episode range and that a launch of a big original series commands tens of millions of dollars for promotion, the deal, is believed to be worth more than $100 million and could change the way people consume TV shows."
Initial industry reactions largely echoed this tone, and, while generally positive, have focused heavily on Netflix's bold, risky, and potentially transformative entry into the original content game. In the face of breathless and rampant media speculation, Netflix's response has thus far been reserved and mostly focused on downplaying the potential implications in its core strategy. In an interview with All Things Digital's Peter Kafka, Netflix content chief Ted Sarandos attempted to put the situation into perspective:
"It's not much of a radical departure in what we do every day. There’s an added risk factor, in that this is the first time we’re licensing something that hasn't been produced, or at least completed."
But there's no risk factor in terms of delivery, because we're not investing development money, and we don't pay for it unless they deliver the show. But it is the first time we've made a very large commitment to a series that hasn’t been produced.
It's just a matter of your philosophy around development. Networks can typically invest tens of millions of dollars in the development of a pilot. And if they put the show on the air and it fails, that's all lost money. There's no monetization of a broken series.
We're betting on the creative team and the source material. "House of Cards" is incredible source material–the BBC version is quite popular already on Netflix. David Fincher's work has all been incredibly well-received on Netflix, and Kevin Spacey's films have all worked on Netflix. The notion that that team will produce a very good product is a pretty safe bet.
[...] If the show proves very popular, it won't be any more expensive than licensing a popular show off of a network. So economically, it's not a seismic shift, if it's popular. If it isn't, then we'll have paid more for an unpopular show than we normally would have.
The day after the after news of the acquisition broke, The Wall Street Journal responded to Deadline.com's report that Netflix could pay more than $100 million as part of a deal for 26 episodes, citing a source "[...] familiar with Netflix's plans," who claimed the actual amount will be "[...] much less than that," a sentiment echoed Peter Kafka in his influential Media Memo blog.
Despite initial media confusion to the contrary, Netflix will not be producing House of Cards directly, but rather will license it from Media Rights Capital who will deficit finance the series. Netflix will have first-run domestic exclusivity, but Media Rights Capital will own the series and retain domestic syndication, foreign distribution, worldwide DVD/Blu-ray, and all other ancillary rights.
Netflix spokesmen have declined to specify what the company will actually be paying for the series House of Cards, but as reliable sources have confirmed it to be significantly less than the series' rumored $100 million production cost, Netflix's fee for the 26 episode deal will necessarily amount to less than $3.85 million per episode. For comparison, during the 2006–2010 television seasons, Fox Broadcast Network paid a license fee of $5 million per episode to 20th Century Fox Television for 24, while satellite provider DirecTV pays license fees of only $1–$1.25 million per episode for its critically acclaimed series Damages and Friday Night Lights. Netflix's licensing costs for House of Cards will therefore fall somewhere between that of a typical high-end hour-long network drama and a modestly budgeted niche cable production.
Another significant cost factor for the series will be Netflix's unique marketing strategy, which, unlike the networks, does not involve spending "anything" to promote the series. According to Netflix spokesman Steve Swasey, "You won't see billboards or TV ads or banner ads." Instead, Netflix will rely entirely on its recommendation technology to suggest House of Cards only to its subscribers who are most likely to enjoy it—viewers who, for example, enjoy political dramas, films by David Fincher, and liked American Beauty and The Usual Suspects. It remains unclear however if or how Netflix plans to leverage House of Cards to drive subscriber growth. But regardless, the frenzy of press attention that emerged even before the acquisition was officially announced demonstrates that, at least for now, public and media interest in the series are high.
At E3 2008, Microsoft announced a deal to distribute Netflix videos over Xbox Live. This service was launched on November 19, 2008 to Xbox 360 owners with a Netflix Unlimited subscription and an Xbox Live Gold subscription allowing them to stream movies and TV shows directly from their Netflix Instant Queue from an application on the Dashboard.
In October 2009, Sony Computer Entertainment and Netflix announced that the service would also be available on the PlayStation 3 from November 2009. The set-up was similar to that on the Xbox 360, allowing Netflix subscribers to stream movies, videogames, and TV shows from their Instant Queue to watch on the console. Unlike on the Xbox 360, the Netflix application was originally available on a Blu-ray Disc (available free to subscribers). On October 19, 2010, a downloadable application was made available through the PlayStation Network. Users do not have to pay for use of the service other than the monthly Netflix subscription.
On January 13, 2010, Nintendo and Netflix announced that the service would become available on the Wii. This service was launched in Spring 2010. The service allows the console to stream content in a user's Instant Queue. Initially, a streaming disc specifically for the Wii was required along with an Internet connection to the console. Besides a Netflix account with unlimited streaming, there are no additional costs for the service. In contrast to the other two consoles, the Wii is not capable of HD resolution. The Wii streaming disc was released for testing to customers starting Thursday March 25, 2010. The disc was released to all registered Netflix members on April 12, 2010. On October 18, 2010, the streaming disc on the Wii was no longer necessary as Netflix became a free downloadable application on the Wii Shop Channel. On the PlayStation 3, the streaming disc is also no longer necessary, as members can download the application through the PlayStation Store, and will be a tab under the XMB.
On June 14, 2011, Nintendo's president Satoru Iwata confirmed that Wii's successor console, the Wii U will also have support for Netflix. Netflix service will launch for the Nintendo 3DS during the Summer of 2011.
Netflix's success has inspired a number of other DVD rental companies both in the United States and abroad, but none of the purely online companies appear to approach Netflix in terms of market share or revenues. Wal-Mart began an online rental service in October 2002, but left the market in May 2005 and now has a cross-promotional arrangement with Netflix. Netflix has also cited Amazon.com as a potential competitor, which until 2008 offered online video rentals in the UK and Germany (now sold to LoveFilm), but has remained coy about any similar intentions for the North American market. Amazon bought Lovefilm in 2011.
Blockbuster Video, the world's largest in-store video rental chain, entered the U.S. online market in August 2004 with a US$19.95 monthly subscription service. This sparked a price war; Netflix had raised its popular three-disc plan from US$19.95 to US$21.99 just prior to Blockbuster's launch, but by October Netflix reduced this fee to US$17.99. Blockbuster responded with rates as low as US$14.99 for a time, but by August 2005, both companies settled at the (identical) current rates. On July 22, 2007, Netflix announced that it would drop the prices of its two most popular plans by US$1.00 in an effort to better compete with Blockbuster's online-only offerings. Blockbuster's subscriber base after one year was roughly a third of Netflix's size and growing, including promotions such as the option to swap DVDs rented online at neighborhood stores and the simultaneous elimination of late fees altogether. Netflix has also been credited with playing a large part in the bankruptcy and shrinkage of several movie rental chains including Blockbuster and Movie Gallery.
Many in-store video rental chains now have unlimited rental plans similar to those of Netflix. Hollywood Video started its Movie Value Pass (MVP) service in late 2004, which enables customers to rent up to three movies at a time (due in five days) for US$15 a month. New releases, however, are typically excluded from the service for two to six weeks in the MVP "Basic" plan. Blockbuster started Movie Pass in 2004, which lets customers keep two to three DVDs at a time for US$25–30 a month, without restrictions or due dates. Hollywood's MVP "Premium" plan offers the same benefits for a comparable price. Both services still require the customer to travel to the store to rent and return the movies, and their respective selections are not as diverse as that offered by Netflix.
Redbox is another competitor that uses a kiosk approach: rather than mailing DVDs, customers pick up and return DVDs at self-service kiosks located in metropolitan areas. Coinstar, the owners of Redbox also plan to launch an online streaming service in early 2011. Some speculate this service to be offered at $3.95 per month.
Netflix and Blockbuster largely avoid offering pornography, but several adult-video subscription services were inspired by Netflix, such as SugarDVD and WantedList. (However, Netflix's catalogue does include films with explicit sexual content, such as Shortbus, 9 Songs, and several movies by Jesús Franco, that are not purely targeted at sexual titillation but which have been compared to pornography.)
